Breakdown on this week’s news about the Spanish Property Market!
This week The Spanish Prime Minister Pedro Sanchez made headlines all over the world with a proposal of adding 100% TAX on property purchases in Spain made by buyers from outside of the European Union. We have received so many calls from clients in the UK, Switzerland and the US, to name a few asking about this.
So what is this alla about – is it true? Will it happen?
Hi, my name is Christofer Fogelberg, I am a certified API Spanish Estate Agent with 24 years in the business. I am the CEO of StartGroup Real Estate and also the vice-president of the Spanish Real Estate Guild GIPE.
So, this week Pedro Sánchez presented a PROPOSAL of 12 measures to address the housing problem in Spain. Some of the proposals are good and viable and some are controversial and probably not viable.
Let’s analyze each one and its viability. At the end of the video I will give you a breakdown of the economic and political situation in Spain for the full context so stick around!
1. Transfer of homes and land to the new Public Housing Company: This measure involves transferring more than 3,300 homes and nearly 2 million square meters of residential land to build affordable rental social housing. So land that is owned by the ministry of defense, for example, and not being used, is transferred to a public company that will promote new properties that will be state owned and rented out. One of the first projects they are doing are 500 properties in Valencia in the area that was hit by the flooding disaster.
Viability: High, as it does not require Congressional approval.
My opinion – a very good measure that should have been done decades ago.
2. Priority in the purchase of homes and land for the Public Housing Company: The new company will have priority in purchasing homes and land.
Viability: High, does not require Congressional approval.
My opinion – Depends if the pricing of the land will be free or not. If the public company buys at market price then fine. But if they expropriate, it will not be good.
3. Shielding of state-protected housing: Ensuring by law that all housing built by the state remains publicly owned indefinitely.
Viability: Medium, requires Congressional approval.
My opinion – I think this is a good idea as it takes away a lot of the risks of corruption and speculation of public funds and property.
4. Limitation on the purchase of housing by non-resident non-EU citizens: Increase the tax burden for these buyers. To tax each purchase with 100%. So a property bought for 200.000€ would have to pay 200.000€ in tax = total cost 400.000€!! The normal tax is between 6-10% depending on the area.
Viability: Low, requires Congressional approval and may face opposition.
My opinion: One of the stupidest ideas this government has ever had. To start with, the tax that is paid when buying a property is controlled by the autonomous regions (they are a bit like states in the US) and not by the central government! Of the 17 autonomous regions 11 are controlled by the conservatives, PP, 1 by the right wing nationalist basque party and only 4 by the socialists, PSOE.
The 11 regions governed by the PP want to REDUCE the ITP tax – which they can!
So PSOE would have to create a whole new national tax for this, which will be next to impossible. Not only is this very unlikely to pass in congress as they have no support for it, but would need major legal changes that would take away power from the regions.
This proposal has created a lot of skepticism and worry about Spain for non-EU buyers. Totally unnecessary! Bear in mind that Pedro Sanchez made these proposals as the leader of the political party PSOE – not as the prime minister.
5. Launch of a PERTE for the innovation and modernization of construction: This project will be developed in Valencia to promote modular construction.
Viability: High, does not require Congressional approval.
My opinion – Great! Modular building techniques save time and money! There has been a traditional resistance in Spain against modular building techniques so it is good if it gets more attention!
6. Public guarantees system for affordable rental: It will protect both landlords and tenants participating in affordable rental.
Viability: Medium, requires Congressional approval.
My opinion – If this can pass through it would be very positive for the rental market. What it means is that it takes off a lot of the risk that property owners have at the moment if the tenant does not pay. I think this can get resistance from the left wing part of the government, Sumar. However the conservative party PP and VOX would probably vote in favour of this, which means it would pass even though part of the government itself is against it. – I will get back to this at the end of the video.
7. Program for the rehabilitation of vacant homes: It will provide grants to those who renovate a flat to put it up for affordable rent.
Viability: Medium, requires Congressional approval.
My opinion: So the idea is that you get tax rebates or grants to renovate a home as long as you put it out for rent later. Obviously on the official price index and for a minimum of 5 years. Personally I do not think this will have a big impact on the market.
8. *100% IRPF tax exemption for landlords who rent according to the Reference Price Index: Proposal to Congress to incentivize affordable rental.
Viability: Low, requires Congressional approval and may face opposition.
My opinion: Great! This is something that we from the industry have long advocated for. So if you put your property for rent you will not pay income tax on the income as long as the rent is not higher than the official index. I think this could really help to get the rental prices down!
9. Taxation for tourist homes: Proposal to Congress for tourist homes to be considered a business and taxed as such.
Viability: Low, requires Congressional approval and may face opposition.
My opinion: This means that every AIRBNB would pay VAT on the rent, which means a price hike. The idea here is to make investing in tourist rental less attractive. The town halls around the country that have too many tourist rentals are already limiting licensing so I think this is an excessive idea. Also it is not clear if the VAT would be at the reduced rate of 10% as the hotels or would come to 21%.
10. *Conditioning of tax advantages for SOCIMIS: Promote affordable rental through tax advantages.
Viability: Medium, requires Congressional approval.
My opinion: the SOCIMIS are a special type of company that is used as an investment vehicle mainly for big funds and have tax benefits. This was created in the credit crisis in 2009 and was made to get more investment to Spain. The proposal is that the SOCIMIS must rent the properties out in order to keep the tax benefits. I don’t really have an opinion about this and I think it would have a limited impact on the market. It is more of an ideological battle for votes.
11. Tightening of regulations against fraud in seasonal rentals: Proposal to Congress to improve regulation.
Viability: Medium, requires Congressional approval.
My opinion:The government will give the tax inspections more funds to inspect and make sure owners of rental properties pay their tax. This is nothing special, every year they do campaigns to combat tax fraud in different areas.
12. Creation of a fund for housing inspections: Strengthen inspections to ensure compliance with regulations.
Viability: High, does not require Congressional approval.
My opinion: Good, as there are nowhere near enough inspections for compliance. But most likely they would have to give money to the Town Hall to do this and the risk is that a lot of money is lost on the way.
In summary, some of these measures require Congressional approval and may face opposition, while others can be implemented directly.
To give you an idea of the political landscape in Spain at the moment and how infected the debate is there is a breakdown.
Pedro Sanchez is the prime minister and leader of the socialist party PSOE. He is in government with SUMAR which is a coalition of 15 left wing parties that do not always agree with each other. Sumar is led by Yolanda Diaz who is the minister of labour and from the communist party.
The government is in minority and needs the votes of several other parties. Actually, last year they did not manage to get a budget through so Spain is still using the budget approved for 2023.
Among the parties that the government needs the support of are both the PNV, the national basque party that is right wing, the BILDU which is the communist national basque party which was previously associated with the terrorist group ETA who left over 800 victims. Their leader Arnaldo Otegi has been imprisoned several times among them for kidnapping and terrorist crimes.
Other parties that they need are the Esquerra Republicana, a left wing Catalan nationalist party, as well as the right wing Catalan nationalist party Junts, whose leader Puigedemont has fled the country to avoid an arrest warrant for causing public unrest in 2017. Then there is a small party from the Canary Islands that also needs to give support, Coalicion Canaria.
So each time the government wants to pass a law they need to negotiate with all of these different parties and give them a lot of influence. For example, to negotiate with Junts a representative from PSOE has had to travel several times to Switzerland as the leader can not set foot in Spain.
When all of these parties vote with the government they have 1 vote more than the opposition in the congress.
On the opposition side we have the Partido Popular (PP) which is a traditional conservative party and the right wing spanish nationalist party VOX.
So, you can see it is a very complicated scene for Pedro Sanchez and the PSOE. In order to make a new tax for non-EU buyers he would need all the votes from his collaborators and it is almost impossible that Junts and PNV, who are right wing parties would support this, unless they got mayor, mayor benefits in other areas to buy their votes. But that would most likely not be accepted by the other collaborators so I consider this almost impossible.
So why did Pedro Sanchez go public with this idea if he knew that it would not be possible to do?
The reason is to fish for votes from the left, especially from SUMAR that is now in government with him. Weakening them in the next election could make his position stronger, which he is in dire need of as his government is hanging very loose and he is getting more and more unpopular amongst voters that are traditionally in the middle of the political spectrum
It will be interesting to see how these proposals develop in the coming months. Thanks for watching and don’t forget to follow me for more analysis!